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Thursday, 18 January 2018

THE “NEW NORMAL” IN CYCLICAL RECESSIONS

There is a
‘new normal’ in cyclical recessions, namely, that the recovery cycle is itself
recessionary for the vast majority of the population, not just in periphery
countries that invariably suffer much more during contracting economic cycles,
but in core countries as well. One of the biggest myths about the contracting
cycles is the underlying assumption that they have an evenhanded impact on all
people across the board regardless of income level and across all geographic
regions. If there is GDP contraction of 3% then every person’s personal income
must be declining by a corresponding amount, therefore recessions are the great
equalizers. This is simply a myth that apologists of capitalism perpetuate so
they the working class and middle class have a sense of “shared sacrifice”
rather than one that disproportionately impacts them while capital becomes even
more concentrated among the wealth during recessionary cycles. When the economy
begins to stabilize and the expansionary cycle takes hold, mainstream economists,
politicians and journalists want people to believe that the expansion and rise
in GDP is evenly distributed and all people benefit, when in fact all
statistical evidence compiled by governments and independent researchers
demonstrate that the benefits go to the capitalist class with ‘trickle-down’
effect minimally impacting the rest of the population, and even less so across
the developing nations. (For more on this topic see Tom Clark and Anthony
Heath, Hard Times: Inequality,
Recession and Aftermath, 2014)

Cyclical
recessions and economic depressions have always been an integral part of the
market economy in the last five centuries. With each contracting cycle occurring
on average every five to ten years within longer cycles of structural expansion
of contraction, capital becomes more concentrated. Consequently, more people
fall into poverty while upward social mobility becomes problematic as the
population expands and the market economy operates under the law of surplus
labor that keeps wages at the lowest possible level. It is important to stress
that while recessions were more frequent between 1945 and 1980, they were also
not as severe while the recovery cycle was sufficiently strong to absorb most
of the surplus labor force from the ranks of the unemployed and to create
opportunities for upward socioeconomic mobility especially for those with a
college degree. After 1980 with the new era of neoliberal policies from Reagan
to the present, recessions are farther apart, the period of cyclical recoveries
is so weak that the vast majority of the population continues to experience
recessionary pressures, often forced to have the spouse work to supplement the
family income, and people with a college degree no longer have the
opportunities for upward social mobility that their parents enjoyed.

Apologists
of the market economy place all blame for the cyclical contractions on
government policy – fiscal monetary, trade, regulatory measures, labor policy,
etc. This assumes that government policy is intended to undermine rather than
strengthen capitalism which government faithfully serves considering its
pro-capital policies. A survey of scholars in the study of ‘crisis theory’ from
David Ricardo, Karl Marx and John Stuart Mill in the 19th century,
to Joseph Schumpeter, John Meynard Keynes and John Kenneth Galbraith in the 20th
century points to structural dynamics in the economy as the underlying causes
of cyclical contractions, rather than any specific government policy or
policies whether on trade, money supply, all intended to promote capital
accumulation. http://www.left-dis.nl/uk/ecomatt.pdf

From the
tulip bubble of the 17th century when Holland was the world’s preeminent
financial and economic center of capitalism, until the subprime bubble of 2008
in the US, recessionary cycles emanate from core countries of the integrated
world economy. Hence, the impact is worse for the periphery economies than for the
core where capital is heavily concentrated and where there is retrenchment from
the periphery to support the base in the advanced capitalist countries. If the
trigger for a cyclical downturn starts in the periphery, as in the case of the
1970s energy crisis amid geopolitical disputes in the Middle East, structural
causes for the crisis rest within the core that wields inordinate geopolitical
and economic influence in the demand rather than supply side of the equation in
everything from pricing to speculation on investment in commodity markets of
core countries. After all, traders – speculators – make money on the down cycle
shorting the market as they do on the up-cycle staying ‘long’. The
inevitability of expansion and contraction is built into the market driven by
the goal of maximizing capital accumulation thus undermining the manipulated
government-supported market by creating overproduction while seeking greater
profits by keeping wages at levels as low as the market will withstand.

Since the
1987 market crash, the integration of the former Soviet bloc countries and
China’s rapid evolution from a command economy into a market one poised to
overtake the US as the world’s richest country are catalytic variables in the
prevention of even deeper recessions than we have experienced. In fact,
Australia has not had a recession comparable to other countries for about 26
years largely because of China stimulating demand for Australian exports. Although
mainstream economists attribute Australia’s phenomenal absence of recession on
neoliberal reforms of the 1980s rather than China’s trade relations with
Australia, they are unable explain why all other countries on earth that have
also undertaken even more reforms than Australia have failed to match
Australia’s record.

The
evolution of global integration in the last three decades with China rapidly
moving into the core of world capitalism has a few years more of global
stimulus partly because of “The Silk Road Economic Belt and the 21st-century
Maritime Silk Road”, known as the One
Belt and One Road Initiative (OBOR). However, despite pursuing a
mix of quasi-statism within the neoliberal global status quo, the Chinese
economy is as much subject to the dynamics of capitalism as any other
globally-integrated national economy. The idea that China, Australia or any
country for that matter will experience uninterrupted economic growth without
any recessions or depressions is naïve and goes against the path of
capitalism’s cyclical nature for five centuries. China has been bankrolling the US dollar buying
bonds to keep the currency relatively stable; at least until China’s reserve
currency has become sufficiently strong in the world economy and the dollar
along with the US market sufficiently less significant in its overall
contribution to global GDP.

In an
article about the next imminent recession, The Atlantic, hardly a leftwing critic of the market economy,
warned about the vulnerabilities of the US economy and society where the elites
have accepted massive capital accumulation and chronic downward social mobility
as the new normal. “Roughly half of
respondents to a Federal Reserve survey conducted in 2015 said that they could
not come up with $400 in an emergency, with a third saying they could not cover three
months of expenses, even if they sold assets, dipped into retirement accounts,
and asked friends and family for help. Outsize wealth and income continue to
accumulate at the very top of the scale, and the finances of millions of
American families remain fragile.
Americans are no worse off than they were when the last recession hit, in other
words, but a decade of growth has not made them more secure, either. American
businesses, on the other hand, have rarely had it so good. Rising demand from
overseas and a weaker dollar have boosted corporate earnings across the board,
so much so that four in five companies beat analysts’ earnings expectations in
the second quarter—the highest share in more than a decade, Bloomberg reports.
The stock market is at or near record highs, and America’s firms are sitting on
trillions of dollars of cash that would help tide them over in the event
of any downturn and concomitant fall in sales and profits. That said, there is
no sign that businesses would use that cash to preserve jobs and help average
workers. Indeed, companies would likely do what they did last time around,
using a downturn as an opportunity to fire workers, pour resources
into technologies that reduce the need for workers, and “upskill” their
labor forces, meaning the
less-educated workers who have recovered least from the last recession would
again be hardest hit. The economy has had three jobless recoveries
following the last three recessions, and the next recession would likely prompt
a fourth.”

Politicians,
mainstream media, think tanks, and academics serving the market economy want
people to ‘feel good’ about the rise in GDP and the phenomenal rise of the markets,
regardless of the average person’s deteriorating living standards. Moreover,
the apologists of the market economy want the average person to be unconcerned
about government raising the level of public debt to redistribute income now
for the richest 10% of the population, debt that will be paid by the average taxpayer
in the future thus further undercutting living standards. According to former
Republican congressman Ron Paul, financial collapse is imminent because the US
Federal Reserve Bank printed trillions of dollars to lift the economy out of
the great recession of 2008. Adamantly opposed to any stimulus to manage the
economy, libertarian Ron Paul agrees with others who caution that central bank
tightening throughout the world is inevitable because assets - everything from
real estate to securities and commodities - is overvalued above the pre-2008
levels.

At some
point, bonds will sell off as China, Japan and Saudi Arabia will look to
diversify away from their dollar holdings to protect their own assets. If we
throw into the mix the rapid pace of computerization of the economy, which will
mean higher unemployment rates and lower wages with people working several part
time jobs, then the consumer stimulus weakens thus slowing down the economy.
The combined impact of all factors mentioned above, become more complicated
when added to the extraordinary rise of global markets in 2017 reflecting
continued capital concentration and posing greater risk for a deep recession
ahead because of grossly uneven income distribution. Markets rose ten times
higher than global GDP in 2017, a level of capital concentration as reflected
in securities markets invariably witnessed right before recessionary cycles
begin and which spells a prescription for an inevitable recession simply
because all asset valuations at these levels are unsustainable and mass
consumer demand is undercut by rapidly rising personal debt.

Accurate
prediction regarding the timing of recessions is hardly more than a guessing
game. Although historical averages of the frequency of recessions help – on average
every five years for the US if we consider the Past 150 years - the only sure
prediction is that a recession will take place and it will do so given all the
variables in the core countries where massive capital concentration hastens the
process, as many mainstream economists and journalists agree while looking to a
Keynesian policy mix as a solution to preserve not only capitalism but the
pluralistic society resting on 18th century bourgeois values.
Considering that the US will not deviate from a long-standing policy of foreign
interventionism, destabilization and military solutions as leverage to gain
strategic, political and economic benefits around the globe, combined with the
possible prospect for economic nationalism manifesting itself in less
cooperation on regional or global trade issues, disequilibrium can be hastened
if certain multinational corporations press their government for hardline trade
policy as a means of securing market share – e.g. the US steel or timber
industry, or the EU foodstuffs industry, Chinese financial sector, etc.

While a recession
is more than likely once again to begin in the US as was the case in 2008, the
trigger could be the creation of a more exclusive trading regional bloc in Asia
that affords preferential treatment to member nations – something similar to
the Sterling Area of the 1930s amid the Great Depression. Although this is
unlikely because the world economy is much more highly integrated today than in
the 1930s, global competition for market share has not changed, but has in fact
become more intense under the neoliberal status quo. Despite the US under Trump
withdrawing from the Trans-Pacific Partnership (TPP) that Obama had negotiated
as a free trade agreement with Japan’s insistence to curb China’s economic
expansion, China is more likely to remain committed to global integration and
continue with import-substitution growth policies that benefit raw material
exporting countries. Therefore, an Asia-based recession resulting from Chinese
Communist Party policies is much more unlikely than a US-based one resulting
from a mix of economic nationalism within the neoliberal regime to capture
greater market share.

As was the
case with the Great Depression of the 1930s and the Great Recession of 2008,
the very forceful state intervention to stimulate the economy and sustain
capitalism combined with the efforts by bilateral, regional, and international
organizations will entail a recovery with unprecedented capital concentration
and further downward trend in living standards for the working class and middle
class not just in core countries but especially in the developing nations. Although
capital concentration is at the root of cyclical downturns, neoliberal policies
with variations of a mi, which includes aspects of Keynesianism are in place
globally will hasten the frequency of recessions. The glaring contradiction following
the next recessionary cycle will be as it has been a thriving stock market will
ensue where the vast majority of the population is not invested and which does
not reflect the “real economy” as compared with continued downward living
standards that will serve as the foundation for the next recession. Nevertheless,
the media, politicians, and academics faithful to neoliberalism will insist
that a rise in GDP and in the stock market ought to be sufficient for people to
feel good about their future.

The
unprecedented rise of personal debt driving the consumer economy will continue
while real wages will remain stagnant even in the expansionary cycle after the
next recession. Even former IMF chief economist Raghuram Rajan among other
apologists of capitalism acknowledge the unsustainability of a debt-ridden
consumer in an economy where ‘financialization’ (speculation) transcends the
empirical productivity standard. More rather than less neoliberalism, as was
the case following the great recession of 2008, will lead to more corporate
fraud, higher prices for everything from energy to health care, and a possible return
to trade wars between the declining American empire using its military muscle
and sanctions as leverage; all of which could entail unraveling of the well-integrated
world economy. As safety nets and to avoid austerity measures, some governments
could introduce versions of ‘crypto-currencies’ while others will ban them,
thus undermining the IMF-recognized basket of hard currencies on which global
trade is based and further muddling the formal economy with the growing
underground economy of shadow banking, tax havens, and everything from money
laundering to drug trafficking flowing back and forth from the formal economy
to the crypto-economy.

Despite
the US and some of its allies desperately trying to argue that if a crisis
comes it would be the fault of North Korea, Iran, perhaps Venezuela in the
Western Hemisphere, and despite the very remote possibility of an accidental
missile strike by any of the ‘nuclear club’ countries, all empirical evidence
points to the US as the superpower seeking conflict and destabilization as
leverage for geopolitical and economic influence. Considering that only a core country
or countries could hasten international financial chaos and among core nations
the US is the most likely candidate partly because it is more immersed in ‘financialization’
and ‘military Kyenesianism’ than any country on earth, it appears that it
defies logic such a course would be a deliberate option because the assumption
is market instability favors capital accumulation. As Jan Kregel, Augusto Graziani
and Guido M. Rey argued in “Instability,
Volatility and the Process of Capital Accumulation”, the neoliberal
regime has done away with Keynesian assumptions about stability, opting for the
“failure of the perfectly competitive
market to allocate information efficiently.” (https://link.springer.com/chapter/10.1007/978-1-349-26981-5_8)

Because
the state will bail out financial institutions, but also because of the
corporate welfare system transferring income from the middle and lower classes
to corporations, neoliberal capitalism has a free hand to pursue what many
describe as casino capitalism manifesting itself in “irrational exuberance”
that defies Keynesian logic or any assumptions about the rationalizing
capitalist democracy. This raises the question of whether governments are
prepared for the eventuality of the next recessionary cycle whatever its causes,
or whether government policies driven by corporate lobbyists are oblivious to
the welfare of society. Market economy apologists argue that it is mostly the
job of central banks to adjust interest rates and the money supply as a means
of maintaining financial equilibrium, while governments need to keep
privatizing, deregulating, and cutting social welfare programs that are a
burden on the budget as the only means to secure a strong stock market equated
with a strong economy an society.

A
fundamental cause of the Great Recession of 2008, ‘financialization’ is back in
full force more than before the market crashed and sent the world economy into
the worst contracting cycle since the 1930s. Whether in pharmaceuticals,
minerals, or commodities, price fluctuations are directly linked to
financialization rather than supply and demand. More than any other factor,
market speculation plays a determining role in price volatility and carries the
burden of market instability to the degree that it can have a ripples effect
across the economy and hasten a recessionary cycle. Under neoliberal policies,
the trend is even more deregulation to allow financialization greater freedom to
determine the course of the world economy.

(Catherine
Karyotis and Sharam Alijani, “Soft commodities and the global
financial crisis: Implications for the economy, resources and institutions”

Along with
the laws of supply and demand, government regulatory measures, the saturated
market and surplus value appropriated from labor value by capitalists, the
financialization of the economy rooted in stock market speculation plays a key
role in precipitating recessionary cycles. It is rather ironic that the very
apologists of capitalism crying out for removing all obstacles to growth
including curbing labor rights and environmental regulation readily rationalize
the low-growth cycle following a recession as “secular stagnation”. Even more
interesting, neoliberal apologists in either the pluralist-diversity camp of
the center, or the more conservative populist rightwing have no problem
accepting ‘secular stagnation’ as ‘normal’ precisely because capitalist
accumulation emanating from speculative investment and continued low taxes
regime, corporate welfare, and low-interest-rate policies is the only thing
that matters rather than real economic growth. In short, even the cyclical
recoveries, at least in the Western core countries, are not sufficiently robust
to account for a reversal of the previous recession’s impact on the middle and
working class and the productivity foundation of the economy continues to weaken
owing to financialization. https://newleftreview.org/II/87/wolfgang-streeck-how-will-capitalism-end

The rate
of productivity in the developed economies dropped from 3.2% during the Johnson-Nixon
presidencies to 0.8% during the Bush-Obama neoliberal era, while in the
corresponding period productivity doubled in developing economies. While growth
rates are expected to remain in the 2% ranged for the advanced capitalist
countries, China and India are also expected to lead the world economy in the
next decades. Low rates of productivity in Western countries will entail low
living standards and continued downward social mobility.From 1972 until 2013, the bottom 90% experienced a negative 0.03%
in their real income, while the top 10% gained almost 1.5%. This income
disparity will intensify in the next decade after the Republican government
passed a massive tax cut that will increase the public debt. The burden will
fall inordinately on the bottom 90% who will pay higher direct and indirect
taxes, suffer cuts in social programs, health and education and endure higher
living standard costs amid stagnant wages. The rising rich-poor gap will translate
into a rising political disillusionment with the system that fails to create
opportunities. https://www.blackstone.com/media/press-releases/article/population-and-productivity;
https://qz.com/633080/the-rise-and-fall-of-american-productivity-growth/

The
inevitability of cyclical recessions resulting in continued downward social
mobility has already resulted in a politically polarizing society. A minority
of the population has accepted the leadership of rightwing populist elements in
the US and across much of the world as saviors. Most of those in the
progressive camp have been co-opted by the neoliberal pluralist-diversity
political wing only to discover that their policies effecting living standards
are not very different from those in the rightwing also representing the same
neoliberal system.

Contrary
to mass distraction in the US about foreign enemies, including North Korea,
Iran, and Russia, and contrary to European rightwing populist views that the non-white
immigrant is the enemy of progress - still the ‘white man’s burden’ - the
recessionary cycles of this century will precipitate internal crises that have
nothing to do with foreign enemies and immigrants but with the decadence of the
social order especially under neoliberal globalism. Although recessionary
cycles do not necessarily lead to social discontinuity, the cumulative effect
of such cycles under neoliberal policies that continue to result in
socioeconomic polarization are leading society in core and periphery countries
toward the path of systemic change, largely because the ‘new normal’ entails
greater economic polarization. While systemic change is not imminent as recessionary
cycles that will take place this century, the neoliberal phase of capitalism is
hastening social discontinuity.

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